Multi-Broker Setting May Call for Living Trust

Q: I am an unmarried man of 62 with adult children. I have several stock brokerage accounts, each with multiple stock holdings. Each account is listed in my name only. I fear that such a registration will make it difficult for my heirs to take possession of these accounts. However, I also worry that changing the ownership to joint tenancy with my children would make the accounts unmanageable, since a number of signatures would be required to complete any transaction. I have heard about living trusts and wonder if one of these would give me the flexibility to trade in my accounts. Perhaps you can offer some guidance.

--J. J. W.

A: Based on the facts you’ve provided, and without knowing just exactly how extensive your stock holdings are, our estate planning experts say it is difficult to say for sure whether a living trust could be the right answer for you. But it might very well be.

How would a living trust operate? We’ll give you a quick and simple overview that necessarily ignores the complex intricacies for which trusts are well known.

In essence, you would transfer your holdings into the trust and would act as its trustee for the remainder of your life. As trustee, you would be entitled to trade your stock to your heart’s content--only you would be doing it in the name of the trust and not your own. It’s a mere technicality that should pose no obstacle to your purpose.

Upon your death, control of the trust would pass to a trustee selected by you. This person would manage the assets, paying your debts and taxes and disposing of your holdings as dictated in your will.

Now, is a living trust any better than a simple will that divides your assets among your heirs and is subject to ratification by the probate court? It depends. One of our legal experts believes that the benefits of living trusts are vastly oversold to the average taxpayer as a means of saving death taxes, probate fees and lengthy probate proceedings.

It is true that living trusts bypass the probate process and its fees. But the costs of establishing these trusts and paying the fees of succeeding trustees often outweigh these savings.

Living trusts are typically best suited for specific situations, including cases in which a person is likely to become incapacitated in the near future, jeopardizing the management of his assets; cases in which a taxpayer has holdings in multiple states that could be subject to probate proceedings in each of those states, and cases in which taxpayers have estates of at least $600,000.

Living trusts are a subject that attorneys and estate planners have been lecturing on for years, and we can’t begin to do the topic justice in the space available here. However, you would be well advised to read as much as you can on the subject, then consult a trusted tax or estate planning attorney.

Two good primers on the subject are “Plan Your Estate: Wills, Probate Avoidance, Trusts & Taxes,� by Denis Clifford, published by Nolo Press in Berkeley. The other is “How to Avoid Probate� by Norman Dacey, published by Crown Publishers in New York. Both should be available at your public library and at bookstores.

Reassessment Law Is Too Late to Help Some

Q: My mother and I owned a home jointly and equally. In 1982, she quit-claimed half her interest to my brother; two years later she quit-claimed the balance of her interest to me. The last event triggered a property tax reassessment on 100% of the home. After much wrangling, the assessor’s office finally agreed that only half the house warranted a reassessment, because I already owned half the house. Now I have read of reassessment exemptions on gifts of up to $1 million worth of real estate between parent and child. Would the deal between my mother and me qualify for that exemption? --C. R.

A: If done today, the property transfer between your mother and you and your brother would be exempt from reassessment by the county assessor’s office. However, the exemption provision was passed by the state’s voters as an amendment to Prop. 13 and did not become effective until 1988. Your transfer, made in 1982 and 1984, cannot be covered by the later exemption, say our legal experts.

One Case of an IRA Being Tax-Deductible

Q: My husband, now 64, rolled over his individual retirement account from a certificate of deposit into a limited partnership 10 years ago. All the funds in the account were “after-tax� dollars plus accumulated interest on which tax payments were deferred. Until this year, the value of the investment was shown as his original purchase price. Now, our latest statement put the value of his partnership interest at about 5% of his original investment. Angry and disappointed, we sold the interest, in effect taking a distribution from the account. What are our tax liabilities? Do we have to pay taxes on the distribution? May we write off our losses on the partnership? --M.S.

A: If your distribution was less than your original after-tax contribution to the IRA, it should not be taxable. Further, you are entitled to write off the losses you suffered to the extent of your original after-tax contribution to the IRA.

Now, faithful readers of this column may cry “error,� recalling that we have advised other questioners that losses in IRAs are not deductible. What’s the difference here? After-tax dollars.

In this case, the IRA was opened with money that had already been taxed, thus establishing a “taxable basis� that Uncle Sam recognizes. To the extent that the account withdrawal is less than the after-tax contribution to the IRA, the taxpayer has a loss that can be deducted on his taxes. Since that amount was already taxed before it was invested in the IRA, the distribution is not taxable a second time.